Atkore Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following information should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in this report. The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward- looking statements. Factors that could cause or contribute to these differences include those factors discussed below and included or referenced elsewhere in this report, particularly in the sections entitled “ Forward-Looking Statements ” and “ Risk Factors. ” Incremental Market Uncertainties We continue to monitor developments related to the novel coronavirus (“COVID-19”) pandemic to assess its impact on our business. Further uncertainty and delays in our end-markets could have a material adverse impact on the demand for our products. Some jurisdictions may raise taxes to help cover pandemic-related costs, and disruptions to or adverse conditions in the financial industry could affect our ability to obtain financing on favorable terms or at all. Factors that contribute to our ability to adjust to the outbreak include benefiting from mostly localized supply chains and continuing to take actions within our control to minimize the disruptive impacts of the outbreak. However, there can be no assurance that we will not be materially and adversely impacted in the future. In addition to the uncertainties brought about by COVID-19, recent events, including central bank interest rate increases, inflation and the Russia-Ukraine conflict, are creating additional uncertainty in the global economy, generally, and in the markets we operate in. COVID-19, the Russia-Ukraine conflict and other factors have had and will continue to have adverse effects on global supply chains, which may impact some aspects of our business. Furthermore, we are mindful of the effects that adverse weather can have on our domestic supply chain. RESULTS OF OPERATIONS The consolidated results of operations for the three months ended December 30, 2022 and December 24, 2021 were as follows: Three months ended (in thousands) December 30, 2022 December 24, 2021 Change % Change Net sales $ 833,821 $ 840,801 $ (6,980) (0.8) % Cost of sales 499,468 485,993 13,475 2.8 % Gross profit 334,353 354,808 (20,455) (5.8) % Selling, general and administrative 89,977 78,151 11,826 15.1 % Intangible asset amortization 12,796 8,229 4,567 55.5 % Operating income 231,580 268,428 (36,848) (13.7) % Interest expense, net 9,488 6,918 2,570 37.1 % Other (income) and expense, net 41 (308) 349 (113.3) % Income before income taxes 222,051 261,818 (39,767) (15.2) % Income tax expense 48,559 56,975 (8,416) (14.8) % Net income $ 173,492 $ 204,843 $ (31,351) (15.3) % 21 Net sales % Change Volume 5.2 % Average selling prices (12.4) % Foreign exchange (0.9) % Acquisitions 7.0 % Other 0.3 % Net sales (0.8) % Net sales decreased by $7.0 million, or 0.8%, to $833.8 million for the three months ended December 30, 2022, compared to $840.8 million for the three months ended December 24, 2021. The decrease in net sales is primarily attributed to decreased average selling prices across the Company’s products of $108.3 million and the unfavorable impact of foreign exchange rates of $7.6 million. These decreases were partially offset by increased net sales of $61.3 million from companies acquired during fiscal 2022 and fiscal 2023 and increased sales volume of $45.6 million. Average selling prices have declined as the Company continues to see normalization of pricing. Cost of sales % Change Volume 6.0 % Average input costs (12.3) % Foreign exchange (1.3) % Acquisitions 8.6 % Other 1.8 % Cost of sales 2.8 % Cost of sales increased by $13.5 million, or 2.8%, to $499.5 million for the three months ended December 30, 2022 compared to $486.0 million for the three months ended December 24, 2021. The increase was primarily due to recent acquisitions during fiscal 2022 and fiscal 2023 of $41.2 million and higher sales volume of $29.0 million. This was partially offset by lower input costs of steel, copper and PVC resin of $59.2 million. Selling, general and administrative Selling, general and administrative expenses increased by $11.8 million, or 15.1%, to $90.0 million for the three months ended December 30, 2022 compared to $78.2 million for the three months ended December 24, 2021. The increase was primarily due to increased general spending on business improvement initiatives of $5.7 million, recent acquisitions in fiscal 2022 and 2023 of $5.5 million and $2.1 million spread across a variety of other spend categories, partially offset by lower variable compensation of $1.1 million and by lower transaction costs of $0.4 million, Intangible asset amortization Intangible asset amortization expense increased to $12.8 million for the three months ended December 30, 2022 compared to $8.2 million for the three months ended December 24, 2021. Increased amortization expense resulted from additional intangible assets acquired in business combinations in fiscal 2022 and 2023. Interest expense, net Interest expense, net increased by $2.6 million, or 37.1% to $9.5 million for the three months ended December 30, 2022 compared to $6.9 million for the three months ended December 24, 2021. The increase is primarily due to increased interest rates on our Senior Secured Term Loan Facility. 22 Other (income) and expense, net Other (income) and expense, net decreased to $0.0 million other expense for the three months ended December 30, 2022 compared to $0.3 million other income for the three months ended December 24, 2021. Income tax expense The Company ’ s income tax rate increased to 21.9% for the three months ended December 30, 2022 compared to 21.8% for the three months ended December 24, 2021. The increase in the current period effective tax rate was driven by a decrease in the excess tax benefit associated with stock compensation offset by a decrease in state tax expense. SEGMENT RESULTS The Electrical segment manufactures high quality products used in the construction of electrical power systems including conduit, cable and installation accessories. This segment serves contractors in partnership with the electrical wholesale channel. The Safety & Infrastructure segment designs and manufactures solutions including metal framing, mechanical pipe, perimeter security and cable management for the protection and reliability of critical infrastructure. These solutions are marketed to contractors, original equipment manufacturers and end users. Both segments use Adjusted EBITDA as the primary measure of profit and loss. Segment Adjusted EBITDA is income (loss) before income taxes, adjusted to exclude unallocated expenses, depreciation and amortization, interest expense, net, stock-based compensation, loss on extinguishment of debt, certain legal matters, and other items, such as inventory reserves and adjustments, (gain) loss on disposal of property, plant and equipment, insurance recovery related to damages of property, plant and equipment, release of indemnified uncertain tax positions, realized or unrealized gain (loss) on foreign currency impacts of intercompany loans and related forward currency derivatives, gain on purchase of business, restructuring costs and transaction costs. We define segment Adjusted EBITDA margin as segment Adjusted EBITDA as a percentage of segment Net sales. Electrical Three months ended (in thousands) December 30, 2022 December 24, 2021 Change % Change Net sales $ 638,705 $ 641,683 $ (2,978) (0.5) % Adjusted EBITDA $ 243,836 $ 279,547 $ (35,711) (12.8) % Adjusted EBITDA margin 38.2 % 43.6 % Net sales % Change Volume 2.9 % Average selling prices (11.2) % Foreign exchange (1.3) % Acquisitions 9.3 % Other (0.2) % Net sales (0.5) % 23 Net sales decreased by $3.0 million, or 0.5%, to $638.7 million for the three months ended December 30, 2022 compared to $641.7 million for the three months ended December 24, 2021. The decrease in net sales is primarily attributed to decreased average selling prices of $66.7 million and the unfavorable impact of foreign exchange rates of $7.6 million. These decreases were partially offset by increased net sales of $55.2 million from companies acquired during fiscal 2022 and fiscal 2023 and increased sales volume of $17.5 million, primarily in the metal electrical conduit and fittings and electrical cable and flexible conduit product lines. Adjusted EBITDA Adjusted EBITDA for the three months ended December 30, 2022 decreased by $35.7 million, or 12.8%, to $243.8 million from $279.5 million for the three months ended December 24, 2021. Adjusted EBITDA margins decreased to 38.2% for the three months ended December 30, 2022 compared to 43.6% for the three months ended December 24, 2021. The decrease in Adjusted EBITDA and Adjusted EBITDA margins was largely due to lower average selling prices over input costs. Safety & Infrastructure Three months ended (in thousands) December 30, 2022 December 24, 2021 Change % Change Net sales $ 195,259 $ 200,510 $ (5,251) (2.6) % Adjusted EBITDA $ 33,404 $ 27,432 $ 5,972 21.8 % Adjusted EBITDA margin 17.1 % 13.7 % Net sales % Change Volume 13.9 % Average selling prices (20.6) % Acquisitions 3.0 % Other 1.1 % Net sales (2.6) % Net sales decreased by $5.3 million, or 2.6%, for the three months ended December 30, 2022 to $195.3 million compared to $200.5 million for the three months ended December 24, 2021. The decrease is primarily attributed to decreased average selling prices of $41.6 million driven by lower input costs of steel partially offset by higher volumes of $28.1 million, primarily in the construction and metal framing product lines, and increased net sales of $6.1 million from companies acquired during fiscal 2022. Adjusted EBITDA Adjusted EBITDA increased by $6.0 million, or 21.8%, to $33.4 million for the three months ended December 30, 2022 compared to $27.4 million for the three months ended December 24, 2021. Adjusted EBITDA margins increased to 17.1% for the three months ended December 30, 2022 compared to 13.7% for the three months ended December 24, 2021. The Adjusted EBITDA increase is primarily due to average selling prices declining slower than input costs. LIQUIDITY AND CAPITAL RESOURCES We believe we have sufficient liquidity to support our ongoing operations and to invest in future growth and create value for stockholders. Our cash and cash equivalents were $307.8 million as of December 30, 2022, of which $62.5 million was held at non-U.S. subsidiaries. Those cash balances at foreign 24 subsidiaries may be subject to withholding or local country taxes if the Company ’ s intention to permanently reinvest such income were to change and cash was repatriated to the United States. In general, we require cash to fund working capital investments, acquisitions, capital expenditures, debt repayment, interest payments, taxes and share repurchases. We have access to the ABL Credit Facility to fund operational needs. As of December 30, 2022, there were no outstanding borrowings under the ABL Credit Facility and $12.1 million of letters of credit issued under the ABL Credit Facility. The borrowing base was estimated to be $325.0 million and approximately $312.9 million was available under the ABL Credit Facility as of December 30, 2022. Outstanding letters of credit count as utilization of the commitments under the ABL Credit Facility and reduce the amount available for borrowings. The agreements governing the Senior Secured Term Loan Facility and the ABL Credit Facility (collectively, the "Credit Facilities") contain covenants that limit or restrict AII’s ability to incur additional indebtedness, repurchase debt, incur liens, sell assets, make certain payments (including dividends) and enter into transactions with affiliates. AII has been in compliance with the covenants under the agreements for all periods presented. We may from time to time repurchase our debt or take other steps to reduce our debt. These actions may include open market repurchases, negotiated repurchases or opportunistic refinancing of debt. The amount of debt, if any, that may be repurchased or refinanced will depend on market conditions, trading levels of our debt, our cash position, compliance with debt covenants and other considerations. Our use of cash may fluctuate during the year and from year to year due to differences in demand and changes in economic conditions primarily related to the prices of the commodities we purchase. Capital expenditures have historically been necessary to expand and update the production capacity and improve the productivity of our manufacturing operations. Our ongoing liquidity needs are expected to be funded by cash on hand, net cash provided by operating activities and, as required, borrowings under the ABL Credit Facility. We expect that cash provided from operations and available capacity under the ABL Credit Facility will provide sufficient funds to operate our business, make expected capital expenditures and meet our liquidity requirements for at least the next twelve months, including payments of interest and principal on our debt. There have been no material changes in our contractual obligations and commitments since the filing of our Annual Report on Form 10-K. Limitations on distributions and dividends by subsidiaries AI, AII, and AIH are each holding companies, and as such have no independent operations or material assets other than ownership of equity interests in their respective subsidiaries. On December 31, 2022, AIH merged into AII, with AII being the surviving entity. Each company depends on its respective subsidiaries to distribute funds to it so that it may pay obligations and expenses, including satisfying obligations with respect to indebtedness. The ability of our subsidiaries to make distributions and dividends to us depends on their operating results, cash requirements and financial and general business conditions, as well as restrictions under the laws of our subsidiaries' jurisdictions. The agreements governing the Credit Facilities significantly restrict the ability of our subsidiaries, including AII, to pay dividends, make loans or otherwise transfer assets from AII and, in turn, to us. Further, AII's subsidiaries are permitted under the terms of the Credit Facilities to incur additional indebtedness that may restrict or prohibit the making of distributions, the payment of dividends or the making of loans by such subsidiaries to AII and, in turn, to us. The Senior Secured Term Loan Facility requires AII to meet a certain consolidated coverage ratio on an incurrence basis in connection with additional indebtedness. The ABL Credit Facility contains limits on additional indebtedness based on various conditions for incurring the additional debt. AII has been in compliance with the covenants under the agreements for all periods presented. 25 The table below summarizes cash flow information derived from our statements of cash flows for the periods indicated: Three months ended (in thousands) December 30, 2022 December 24, 2021 Cash flows provided by (used in): Operating activities $ 198,851 $ 97,192 Investing activities (117,187) (45,024) Financing activities (164,831) (129,048) Operating activities During the three months ended December 30, 2022, the Company was provided $198.9 million by operating activities compared to $97.2 million during the three months ended December 24, 2021. The $101.7 million increase in cash provided was primarily due to $81.5 million decrease in cash used in working capital primarily due to lower inventory and accounts receivable as well as $47.2 million of tax impacts, partially offset by decreased operating income. Investing activities During the three months ended December 30, 2022, the Company used $117.2 million in investing activities compared to $45.0 million during the three months ended December 24, 2021. Cash used in acquisitions increased in fiscal 2022 by $46.1 million primarily as a result of the acquisition of Elite Polymer in the first quarter of fiscal 2023. The remaining increase in cash used in investing activities was driven by $25.6 million of additional capital expenditures. Financing Activities During the three months ended December 30, 2022, the Company used $164.8 million in financing activities compared to $129.0 million used during the three months ended December 24, 2021. The increase in cash used in financing activities is primarily due to $45.5 million more cash used to repurchase common stock during the three months ended December 30, 2022 compared to the same period in the prior year. CHANGES IN CRITICAL ACCOUNTING POLICIES AND ESTIMATES There have been no material changes in our critical accounting policies and estimates since the filing of our Annual Report on Form 10-K. RECENT ACCOUNTING STANDARDS See Note 1, “Basis of Presentation and Summary of Significant Accounting Policies” to our unaudited condensed consolidated financial statements. FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements and cautionary statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on management’s beliefs and assumptions and information currently available to management. Some of the forward-looking statements can be identified by the use of forward-looking terms such as “believes,” “expects,” “may,” “will,” “shall,” “should,” “would,” “could,” “seeks,” “aims,” “projects,” “is optimistic,” “intends,” “plans,” “estimates,” “anticipates” or other comparable terms. Forward-looking statements include, without limitation, all matters that are not historical facts. They appear in a number of places throughout 26 this Quarterly Report on Form 10-Q and include, without limitation, statements regarding our intentions, beliefs, assumptions or current expectations concerning, among other things, financial position; results of operations; cash flows; prospects; growth strategies or expectations; customer retention; the outcome (by judgment or settlement) and costs of legal, administrative or regulatory proceedings, investigations or inspections, including, without limitation, collective, representative or class action litigation; and the impact of prevailing economic conditions. Forward-looking statements are subject to known and unknown risks and uncertainties, many of which may be beyond our control. We caution you that forward-looking statements are not guarantees of future performance or outcomes and that actual performance and outcomes, including, without limitation, our actual results of operations, financial condition and liquidity, and the development of the market in which we operate, may differ materially from those made in or suggested by the forward-looking statements contained in this Quarterly Report. In addition, even if our results of operations, financial condition and cash flows, and the development of the market in which we operate, are consistent with the forward-looking statements contained in this Quarterly Report, those results or developments may not be indicative of results or developments in subsequent periods. A number of important factors, including, without limitation, the risks and uncertainties discussed or referenced under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q, could cause actual results and outcomes to differ materially from those reflected in the forward-looking statements. Additional factors that could cause actual results and outcomes to differ from those reflected in forward-looking statements include, without limitation: • declines in, and uncertainty regarding, the general business and economic conditions in the United States and international markets in which we operate; • weakness or another downturn in the United States non-residential construction industry; • widespread outbreak of diseases, such as the novel coronavirus (COVID-19) pandemic; • changes in prices of raw materials; • pricing pressure, reduced profitability, or loss of market share due to intense competition; • availability and cost of third-party freight carriers and energy; • high levels of imports of products similar to those manufactured by us; • changes in federal, state, local and international governmental regulations and trade policies; • adverse weather conditions; • increased costs relating to future capital and operating expenditures to maintain compliance with environmental, health and safety laws; • reduced spending by, deterioration in the financial condition of, or other adverse developments, including inability or unwillingness to pay our invoices on time, with respect to one or more of our top customers; • increases in our working capital needs, which are substantial and fluctuate based on economic activity and the market prices for our main raw materials, including as a result of failure to collect, or delays in the collection of, cash from the sale of manufactured products; • work stoppage or other interruptions of production at our facilities as a result of disputes under existing collective bargaining agreements with labor unions or in connection with negotiations of new collective bargaining agreements, as a result of supplier financial distress, or for other reasons; • changes in our financial obligations relating to pension plans that we maintain in the United States; • reduced production or distribution capacity due to interruptions in the operations of our facilities or those of our key suppliers; • loss of a substantial number of our third-party agents or distributors or a dramatic deviation from the amount of sales they generate; • security threats, attacks, or other disruptions to our information systems, or failure to comply with complex network security, data privacy and other legal obligations or the failure to protect sensitive information; • possible impairment of goodwill or other long-lived assets as a result of future triggering events, such as declines in our cash flow projections or customer demand and changes in our business and valuation assumptions; • safety and labor risks associated with the manufacture and in the testing of our products; 27 • product liability, construction defect and warranty claims and litigation relating to our various products, as well as government inquiries and investigations, and consumer, employment, tort and other legal proceedings; • our ability to protect our intellectual property and other material proprietary rights; • risks inherent in doing business internationally; • changes in foreign laws and legal systems, including as a result of Brexit; • our inability to introduce new products effectively or implement our innovation strategies; • our inability to continue importing raw materials, component parts or finished goods; • the incurrence of liabilities and the issuance of additional debt or equity in connection with acquisitions, joint ventures or divestitures and the failure of indemnification provisions in our acquisition agreements to fully protect us from unexpected liabilities; • failure to manage acquisitions successfully, including identifying, evaluating, and valuing acquisition targets and integrating acquired companies, businesses or assets; • the incurrence of additional expenses, increases in the complexity of our supply chain and potential damage to our reputation with customers resulting from regulations related to “conflict minerals”; • disruptions or impediments to the receipt of sufficient raw materials resulting from various anti-terrorism security measures; • restrictions contained in our debt agreements; • failure to generate cash sufficient to pay the principal of, interest on, or other amounts due on our debt; • challenges attracting and retaining key personnel or high-quality employees; • future changes to tax legislation; • failure to generate sufficient cash flow from operations or to raise sufficient funds in the capital markets to satisfy existing obligations and support the development of our business; and • other risks and factors described in this Quarterly Report and from time to time in documents that we file with the SEC. You should read this Quarterly Report completely and with the understanding that actual future results may be materially different from expectations. All forward-looking statements attributable to us or persons acting on our behalf that are made in this Quarterly Report are qualified in their entirety by these cautionary statements. These forward-looking statements are made only as of the date of this Quarterly Report, and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, and changes in future operating results over time or otherwise. Comparisons of results for current and any prior periods are not intended to express any future trends, or indications of future performance, unless expressed as such, and should only be viewed as historical data. Item 3. Quantitative and Qualitative Disclosures about Market Risk There have been no material changes to the quantitative and qualitative disclosures about market risks previously disclosed in our Annual Report on Form 10-K.